U.S. stocks opened higher Friday, with the Dow Jones Industrial Average topping the symbolic 18,000 mark in the morning, after oil prices rose above $60 a barrel for the first time in 2015. The move comes a day after all three major U.S. indices closed at their highest level this year.

The recent rebound in global oil prices has been driven by the sharp drop in the number of rigs drilling and the slew of announcements from major oil companies that are cutting back on investment, says London-based firm Capital Economics.

The oil prices expected to gradually climb back to around $70 per barrel over the medium term, helped on their way by further evidence of reductions in investment. However, the prices wont shoot back to $100 anytime soon.

Brent crude, the benchmark for global oil prices, added $2.20 to $61.48 a barrel for April 15 delivery on the London ICE Futures Exchange. West Texas Intermediate crude, the benchmark for U.S. oil prices, added $1.54 to $52.75 a barrel for March 15 delivery on the New York Mercantile Exchange.

The global markets also got a boost after the eurozone economy expanded more than expected last quarter, boosted by strong growth in Germany, Europe’s largest economy. Gross domestic product in the 18 countries that share the euro, rose 0.3 percent in the fourth quarter over the previous period.

Most second and third liner oil and gas (O&G) stocks in Bursa Malaysia show some improvement. Among them, Petra Energy Bhd rose 17.8% from it lowest in last two months to close at RM1.52, Alam Maritim Resources gain 53.4% to close at RM0.79, while Petronas Chemical increase 14% to RM5.30,

TH Heavy Engineering was up 58.2% to RM0.435, Scomi gain 25.5% to RM0.295, while Perisai Petroleum close at RM0.67, up 76.3% and KNM gain the most to close at RM0.72 or 82.3% from it lowest.

SapuraKencana converted US$2.3bil (RM8.18bil) of its existing conventional borrowings into an Islamic facility, paving way for it to return to the Securities Commission’s list of Shariah-compliant securities. SapuraKenchana gained 44.6% to close at RM2.92. Bumi Armada was also up 21.2% to RM1.20, while Dialog gain 32.8% to RM1.58 on last Friday.

Based on the global oil price movement, the consumer fuel price such as RON95 and RON97 for March could possibly increase. The Malaysian Ringgit compared to US Dollar is at RM3.58 per USD.

This counter looks interesting as it chart was consistently up. Based on the chart, both stochastic and MACD are crossed. This could be some sort of buy signal. The last close price is RM2.54, 11 cents higher than previous closed price. Based on the history, after a big jump in price, it will follows by price correction. We’ll wait and see the next reaction of this counter.

Employees Provident Fund (EPF) Board also keeps acquire more shares from this counter as well. One of the reason could be the dividend announced on April 13 (Final Single Tier Dividend of 7.25%). Ex-date for this dividend is on this 21st May 2012.

BUY, with a higher target price. Higher valuations are warranted for both Bank Islam and Syarikat Takaful (STMB), given their strong underlying fundamentals. Pegging on higher P/BV valuations for both companies, our SOP valuation for BIMB Holdings is raised to MYR2.95 from MYR2.55, which implies 16% upside to the current share price. Our revised target P/BV multiple for STMB (Not Rated) values the takaful operator at MYR4.75, or 20% upside to its current share price.

Despite intervention Italian bond yields shot up 80bp in a week, yield on 2-year Greek note now at over 50%, credit default swaps in Europe shot to new records and interbank lending at 30-months low. Growth in eurozone in 3Q not likely to improve from 0.2% in 2Q while Greece is sinking faster than expected.

Germany has curbed power of rescue funds and recent political development show strong oppositions to bailouts of debt-saddled nations. There is no political solidarity in eurozone and without coordinated policy response, the market will impose its own solutions which will be brutal and messy.

Zero job creation in US in August and downward revisions for June and July further affirm a weakening recovery that could easily fall into contraction. The job numbers suggest that US economy has been in recessionary mode for the last 4-5 months.

Obama’s job plan this Thursday is unlikely to be a game changer as his chances of unveiling big, bold spending initiatives look slim. A stimulus plan will be constrained by budget cuts, tight debt ceiling and political deadlock.

On domestic, we have lowered EPS growth numbers to +9.7% (from +11.2%) for 2011 and +11.2% (from +14%) for 2012 with downside risk. New YE KLCI target downgraded to 1,520 from 1650. We also introduce 2012 YE target of 1,650.

Domestic corporates

Earnings forecasts and target downgraded. We have lowered our expectations based on the dismal 2Q results and in view of protracted soft patch in US and worsening sovereign debt crisis in Europe. Besides lowering our earnings forecasts, we also expect lower PER multiples of 13.6x 2012 from 14.6x due to rising risk aversion. Note that there is a further downside risk to our numbers given that the debt crisis in Europe is fast turning into solvency crisis of states and banks while US could easily slip into a double dip.

On specifics, major earnings disappointments came from MMHE, Bumi Armada, Axiata, Maxis, MISC , Tenaga, CIMB, RHB. Positive surprises came from plantations. Major earnings downgrades were for Tenaga and MISC. Rating upgrades were mainly smaller caps while major downgrades (to SELL) were KNM, MISC and Proton. Despite challenging environment, we maintain loans growth forecast of 12.5% for 2011 but lower 2012 to 10.4% from 11.5%.

We remain defensive at the core. Hold on to domestic focussed stocks in construction and O&G while telcos and M-REITs are still good for yields. We have replaced Axiata with TM in our Top Buy list and incorporated new growth (SOP, TSH) and value stocks (BIMB, MPHB, Hartalega) . Among the big banks, only AMMB make the grade.

Net outflow of funds in August. Net foreign selling in Malaysian equities amounted to RM3.8bn in August, reversing 58% of the net inflow of RM6.6bn in the preceding 4 months. The last time we saw this magnitude of net selling was in February this year (- RM3.4bn). The big targets of selling were those with over 30% foreign shareholdings such as CIMB, Genting Bhd, Genting Malaysia, Gamuda, IJM, AirAsia. We estimate foreign shareholding have tapered off to below 22% (6% of which are strategic holdings).

The risk-off mode so prevalent now means that foreign money is not likely to be a positive contributor to the KLCI at least until global economic visibility becomes clearer.

Global Economics

European debt crisis worsening

Italy backtracked from its earlier commitment on budget cuts due to pressure from its voters. As a result, its 10-year bond yield shot up by 80bp in just about a week to now 5.65% despite ECB intensifying its purchases. The country still faces a possibility of a general strike as the government seek a USD65bn austerity plan.

Germany rejects deals on Greek collateral (in return for further aid) as well as a common bonds for the eurozone. The present government faces dissent within the coalition as well as losing supports from its voters who are opposed to bailing out the troubled PIIGs.

Bank meltdown in Europe cannot be discounted

European banks’ balance sheets are damaged from holding PIIGs debts. The feedback loop between the banking system and sovereign debt is creating fear. The market has punished banking stocks in belated recognition of undeclared liabilities. Meanwhile, the cost of insuring against bank failures have reached levels beyond even those seen at the height of 2008 subprime crisis.

There is a growing recognition that Europe banking fragility could become systemic and cause a second economically-debilitating credit crunch. European banks need to recapitalize but Chinese banks have cut credit lines and American money market funds have shifted away. Private sector recapitalization isn’t possible now that investors can’t be sure if banks are solvent. And public sector recapitalization is extremely hard given the fact that the eurozone economic structure is incoherent.

The reckoning may not be orderly but take a market-imposed chaotic course.

Today CIMB has launched the first Callable Bull Certificates (CBLC) type of structured warrant in Bursa Malaysia. According to Bursa Malaysia website:

CBBC is another type of structured product, much like a structured warrant and is also known as “knock out”, “turbo” or “stop loss” warrants. CBBC is also likened to Certificates For Difference (CFD). They are issued either as Bull or Bear certificates with a fixed expiry date, allowing investors to take bullish or bearish positions on the underlying instrument. CBBCs track the performance of an underlying instrument without requiring investors to pay the full price required to own the actual underlying instrument. On Bursa, CBBC is allowed to be issued for a tenure of 3 months to 5 years.

During this tenure, a CBBC could be ‘called’ by the issuer when the price of the underlying instrument reaches a level known as the “Call Price” specified in the listing document. If the Call Price is reached before expiry, the CBBC will expire early and the trading of that CBBC will be suspended and terminated. The specified expiry date from the listing document will no longer be valid and the CBBC will be settled in cash only.

Maxis Bhd will offer shares to retail investors for as much as RM5.20 each and the final price will be set on November 9, after a bookbuilding exercise for institutional investors is completed.

Maxis is offering for sale 2.25 billion existing shares, or 30 per cent of the company, in the IPO. Out of this, retail investors, including Maxis customers and staff, are allocated 212.3 million shares, or 2.8 per cent.

The retail offering will close on November 5 and the company is scheduled to list on Bursa Malaysia on November 19.